Administration of family trusts Flashcards
(37 cards)
1
Q
Selecting trustees
A
- In general, any person except a minor may be a trustee: s 20 LPA 1925.
- There are no rules prescribing a minimum or maximum number of trustees but there is an exception for trusts of land, because legal title to land may only be held by a maximum of four persons. It is also necessary for such trusts to have a minimum of two trustees, in order to give good receipt.
- It is good practice to appoint more than one trustee but, as trustees must generally act unanimously, it is preferable to keep numbers relatively low to avoid administrative difficulties.
2
Q
Appointment of original trustees: Lifetime
A
In the case of an inter vivos (lifetime) trust, the settlor has two broad choices:
(a) A self-declaration of trust
(b) A transfer on trust
3
Q
Appointment of original trustees: Wills
A
(1) The testator names their executors in their will. If the executors are able and willing to act, they will take legal title to the testator’s entire estate.
(2) The executors then administer the estate. Once they have paid any liabilities of the testator, they must distribute the property in accordance with the will. This includes ensuring that legal title is vested in the intended trustees of any trusts.
(3) Sometimes the same people will be named as executors and trustees. In such cases, the executors will now hold the legal title to the trust property in their capacity as trustees instead of as executors.
(4) If the testator has named someone different as trustee, the executors must transfer the property to them.
4
Q
Appointment of new trustees
A
- Once the settlor has created the trust, their involvement ceases and they do not automatically have the right to name replacement trustees (and in the case of testamentary trusts this would of course be impossible). Instead, replacement trustees may be appointed in one of the following ways:
(a) Using any express powers to appoint trustees found in the trust instrument.
(b) Using statutory powers to appoint trustees.
(c) By the beneficiaries exercising their Saunders v Vautier rights.
(d) In the case of charitable trusts, by the Charity Commission.
(e) By the court.
5
Q
General statutory power to appoint new trustees
A
s 36 Trustee Act 1925
The general statutory power can be exercised in the following cases:
(a) On the death of a trustee
(b) If a trustee is abroad for over a year
(c) If an appointed trustee is a minor or otherwise lacks capacity to act
(d) If a trustee wishes to retire, refuses to act or is unfit to act
- This power may be exercised by the persons nominated in the trust instrument to appoint trustees or, if there are no such persons, by the surviving or continuing trustees.
- If all the trustees have died, the power is exercisable by the personal representatives of the last to die (s18(2) TA 1925).
6
Q
Appointment of new trustees: Saunders v Vautier rights
A
- If the beneficiaries of a trust agree, they can exercise their Saunders v Vautier rights to change the trustees of the trust.
- s 19 Trusts of Land and Appointment of Trustees Act 1996 gives beneficiaries with Saunders v Vautier rights the power to direct the trustees to appoint a new trustee.
- This power must be exercised in writing and cannot be exercised in cases where the trust instrument contains an express power to appoint trustees.
7
Q
Appointment of a new trustee: Court powers
A
- It is a core principle that equity will not allow a trust to fail for want of a trustee.
- For this reason, if a trust would be without a trustee because there is nobody authorised who is able and willing to make the appointment, the court can make the appointment instead. The court’s power to do this is found in s 41(1) TA 1925.
- The power in s 41 is extended to the Charity Commission in the case of charitable trusts: s 69(1)(b) Charities Act 2011.
8
Q
Appointment of a new trustee: Court powers - Considerations for the court in exercising this power
A
(a) The court should consider the wishes of the settlor or testator (if such wishes are expressed or evidenced in the trust instrument)
(b) The court should not appoint a trustee where there a dispute between the beneficiaries as to whether that person would be appropriate.
(c) The court should consider whether the appointment will promote or impede the trust administration. This means the court should take into account the views of the existing trustees, but must consider whether those views are reasonable.
9
Q
Removal of trustees
A
- The trust instrument may contain rules dealing with removal of trustees.
- The general statutory power to appoint trustees also effectively extends to removing trustees in the circumstances where it is considered necessary to replace them.
- The court also has both statutory and common law powers to remove trustees.
- The Charity Commission also has the power to remove charity trustees.
- the general statutory power in s 36 TA 1925 provides for the replacement of trustees in recognised circumstances
- The court’s statutory power to appoint trustees under s 41 TA 1925 also extends to the removal of trustees. In particular, this section envisages the court exercising a power to replace trustees in cases where the trustee is bankrupt, lacks capacity or is a company which is in liquidation or has been dissolved.
- Separately, the court also has an inherent jurisdiction to remove trustees in cases where it is concluded that it is not appropriate for the trustee to remain in office (e.g. where they act dishonestly).
10
Q
Retirement of trustees - Voluntary retirement
A
- A trustee can voluntarily retire by deed where there are at least two people or one trust corporation to act as trustees and the co-trustees and any person with a power to appoint trustees consents: s 39(1) TA 1925.
- Trustees who retire must also comply with the statutory requirements or they will remain in office. A trustee who retires from the trust should obtain a formal discharge of liability from the beneficiaries.
11
Q
Retirement of trustees - By direction of the beneficiaries
A
- In addition to having a power under s 19 TLATA to appoint trustees, beneficiaries with Saunders v Vautier rights also have the power to compel a trustee to retire from the trust. The direction must be made in writing and requires the agreement of all beneficiaries.
- the power can only be exercised if, after the retirement of the trustee, there will remain at least two trustees or one trust corporation.
12
Q
Dispositive duties of trustees - Distribution
A
Three broad circumstances in which trustees distribute trust property:
(1) When they have an obligation to do so under the terms of the trust
(2) When directed to do so by beneficiaries with Saunders v Vautier rights
(3) In exercise of a dispositive power such as a power of appointment, maintenance or advancement
13
Q
Dispositive duties of trustees - Duty to distribute
A
- When beneficiaries have a right to income or capital under the terms of a trust, the trustees are under an obligation to make the payments to the beneficiaries as soon as possible. The trustees must not wait for the beneficiaries to demand the payment.
- e.g. if a trustee holds money on trust for a minor beneficiary until the beneficiary reaches 18, the beneficiary will have a right to receive the money when they reach 18. The trustee must therefore pay the money to the beneficiary when they reach that age. Failure to do so will constitute a breach of trust.
- It is important to check the trust terms to determine whether the trustee has the power to accumulate the income (i.e. add it to the capital) or if it must be paid out. If the trustees are required to distribute income, they must do so within a reasonable period after its receipt.
14
Q
Liability for wrongful distribution
A
- There may be times when trustees are unsure of how to carry out their obligations. For example, they may be unsure of how to interpret the provision of a trust deed. Alternatively, the trust provisions may be clear but the trustees may be unsure as to how to distribute the trust fund because they are unable to identify or locate some or all of the beneficiaries.
- the trustees must still fulfil their duty to distribute but can take steps to avoid liability for breach of trust. These include:
(a) Advertising for claimants
(b) Retaining a fund or paying money into court
(c) Seeking directions from the court
(d) Taking out insurance against wrongful distribution
15
Q
Court directions
A
- If the trustees are unsure of their obligations, the prudent thing to do is seek directions from the court. Trustees who act in accordance with the directions of the court will not be liable.
- It is common to seek what is known as a Benjamin order in cases where a known beneficiary cannot be found and is presumed dead. This is an order directing that the trustees are free to distribute property to other beneficiaries and prevents the trustees being susceptible to a claim from the missing beneficiary if it transpires that they are still alive.
16
Q
Missing beneficiary: Benjamin orders
A
- In Re Benjamin itself the son of the testator had disappeared approximately a year before the testator died. The trustees made an application to the court for directions as to how to distribute the estate.
- After reviewing evidence that it was highly likely the son had died, a special order was made by the court allowing the trustees to distribute the estate on the basis that the son had not survived.
- The Benjamin order was expanded by Re Green’s Will Trusts, where the testator had expressly left all her property to her son in her will, fully aware that he had gone missing several years previously and was certified presumed dead. The testator set out in her will that should her son not claim the estate before 2020 it would go to charity. The court went against the testator’s express wishes and made an order that the executors could distribute the estate to charity.
17
Q
Unknown beneficiaries: advertisements
A
- In some cases, the trustees may be unsure as to whether they have properly identified all the beneficiaries. For example, the trustees may have an obligation to divide trust property equally between a conceptually certain class of individuals (e.g. the nieces and nephews of the settlor) but are unsure who all those people are.
- To prevent liability to unidentified beneficiaries, the trustees may put an advertisement in a national newspaper, giving notice of their intention to distribute to known beneficiaries two months after the advertisement. This puts unknown beneficiaries on notice that they must identify themselves to the trustees.
- After the two month notice period, the trustees may distribute to known beneficiaries and will have no personal liability to the unknown beneficiaries.
18
Q
Beneficiaries coming forwards later
A
- Where the property has been distributed the only option for a beneficiary will be a proprietary or receipt-based claim against the recipient of the property.
- However, if the property has not been fully distributed, it will still be possible for the beneficiary to claim any undistributed property from the trustee.
19
Q
Retained funds
A
- Another option is for the trustees to retain a fund setting aside trust assets in order to be able to discharge liabilities if the missing beneficiaries come forward
- This is also an option in cases where the trustees remain unsure as whether they have identified all potential beneficiaries. In such cases, they may choose to distribute to the known beneficiaries but hold some money back in case other beneficiaries come forward in future.
- This is quite a risky strategy in cases of unknown beneficiaries as it will be difficult for the trustees to quantify the respective interests of the known and unknown beneficiaries, and could well result in a claim against the trustees for having paid out the wrong amount to the known beneficiaries.
- Alternatively, in circumstances where trustees can establish genuine doubt as to the location of beneficiaries, or are unable to give receipts, they can pay money into the court, giving the court legal control over the funds and allowing the trustees to effectively retire: Section 26(1) TA 1925.
20
Q
Insurance
A
- Trustees may decide to take out insurance to guard against the risk of missing or unknown beneficiaries emerging after the trust fund has been distributed.
- Risk-averse trustees may well choose to use insurance alongside another mitigation measure such as advertisements or seeking directions from the court. This would be a more prudent approach.
21
Q
Dispositive powers - Income and capital
A
- In some cases different beneficiaries will be entitled to the income and the capital, e.g. a life interest trust.
- In other cases, the same beneficiary may be entitled to both capital and income but not necessarily at the same time, e.g.:
- (a) A beneficiary may have a right to receive capital upon the occurrence of a particular event, such as reaching a specified age. In the meantime, they may be entitled to receive the income as it arises.
- (b) The trustees may have a power or obligation to accumulate the income (i.e. add it to the capital). If the income is accumulated, the beneficiary will not receive anything until it is time for the capital to be distributed.
22
Q
Entitlement to income
A
- Adult beneficiaries with vested interests in trust property will usually have a right to receive the trust income as it arises.
- Adult beneficiaries with contingent interests have a statutory right under s 31(3) Trustee Act 1925 to receive income if the trust ‘carries the intermediate income’
- Minor beneficiaries will not usually be entitled to receive trust income until they reach the age of 18.
- However, s 31(1) TA 1925 gives the trustees a power of maintenance. This allows the trustees to pay trust income to beneficiaries who would benefit from receiving it immediately, instead of waiting for their interest to vest in possession.
- the provisions of s 31 TA 1925 may be excluded or varied by a trust instrument: s 69(2) TA 1925.
23
Q
Power of maintenance
A
- Where a minor has a vested interest in trust property (or a contingent interest which carries the intermediate income), the trustees have a wide statutory power under s 31 TA 1925 to pay the income as they think fit. The trustees may:
- (a) Pay the income to the child or their parent or guardian.
- (b) Apply the income directly for the child’s ‘maintenance, education or benefit’.
- Income which is not paid out under s 31 must be accumulated but can still be paid out subsequently using the power of maintenance as long as the beneficiary remains under 18.
- Once the beneficiary reaches 18, the accumulated income is added to the capital and can no longer be accessed by the beneficiary until they are entitled to receive the capital. Income generated after the beneficiary is 18 must be paid directly to them.
24
Q
Important qualifications to the power of maintenance
A
(a) The power of maintenance is a fiduciary power. The trustees must consciously consider the exercise of the power and, if they choose to exercise it, must act in good faith in the interests of the beneficiary.
(b) The income must be used for the primary benefit of the minor beneficiary, but it does not matter that it may therefore indirectly benefit their parent or guardian.
(c) It is an improper exercise of the power to unquestioningly pay it to the minor’s parent or guardian (Wilson v Turner)
- Because the power of maintenance only applies during the minority of a beneficiary, it is good practice for trustees to consider exercising the power shortly before the beneficiary turns 18, particularly if the beneficiary has a contingent interest to the trust capital.
25
Power to advance capital
- A beneficiary who expects to receive capital from a trust at a future date may wish to receive their capital before it vests in possession.
- s 32 TA 1925 gives trustees the power to use capital for the ‘advancement or benefit’ of a beneficiary before the beneficiary becomes absolutely entitled.
26
Qualifications to the power to advance capital
(a) May be used by both adult and minor beneficiaries
(b) Applies to both vested and contingent interests
(c) Can be modified or excluded by the trust instrument: s 69(2) TA 1925
- The trustees may use the power of advancement to pay up to 100% of a beneficiary’s entitlement before it vests at all (if the interest is contingent) or before it vests in possession (if the interest is vested in interest).
- Because the exercise of the power may prejudice other beneficiaries, the power may only be exercised with the written consent of beneficiaries with a prior interest. e.g. if a trustee holds property on trust for A for life, remainder to B, the trustees can only exercise the power of advancement in favour of B with A’s written consent.
- Consent can only be provided by beneficiaries who are of full age and sound mind.
27
Meaning of ‘advancement’/benefit of the beneficiary
- A key issue for trustees when deciding whether to exercise the power of advancement is whether this action will result in the advancement or benefit of the beneficiary.
- Advancement has now been recognised to provide for an immediate financial benefit for a beneficiary, such as to avoid an inheritance tax liability, ‘any use of the money which will improve the material situation of the beneficiary’ (Pilkington v IRC)
- can include the improvement of the beneficiary’s moral well-being by giving the money for charitable purposes, but only to the extent that the beneficiary would have otherwise used their own resources for such purposes (Re Clore's)
28
Advancement that was not for the benefit of the beneficiary
Re Pauling’s Settlement Trusts: the trust was managed by a bank with a power to advance property to the children of a marriage. The bank made a number of advancements to the children. These advancements were used for the benefit of the children’s parents rather than their own benefit, including the purchase of a house in the parents’ names. It was found that the trustees were obliged to check that the money had been applied for the purpose that it was advanced and not leave the recipients free to spend the money as they wished. The bank’s failure to do this was a breach of trust.
29
Advancement - Bringing the payment into account
- The trustees may use the power of advancement to pay up to 100% of a beneficiary’s beneficial entitlement.
- Payment will be brought into account when the beneficiary becomes absolutely entitled, i.e. the amount that the beneficiary will receive when their interest vests will be reduced proportionately to reflect the proportion of the capital that they received early.
- Trustees have a choice between treating the share advanced as a proportionate share of the overall trust value or its strict monetary value.
30
Dealings with equitable interests
As beneficiaries of trusts have equitable proprietary rights, they are able to deal with their equitable interests under the trust. Can do this in 4 principal ways:
(a) A direct assignment to a third party
(b) A direction to the trustee to hold the trust property for a new beneficiary
(c) A direction to the trustee to transfer full legal ownership to a third party
(d) A declaration of trust over the equitable interest (i.e. the creation of a sub-trust)
31
Section 53(1)(c) LPA 1925
‘A disposition of an equitable interest subsisting at the time of the disposition must be in writing signed by the person disposing of the same or by his agent lawfully authorised in writing or by will.’
32
Effect of s 53(1)(c) LPA 1925
- applies to all equitable interests.
- requires the disposition to be in writing (not merely evidenced in writing). The effect of non-compliance is that the purported disposition is void.
- allows for signature by an agent but only if they have been given written authorisation for this.
33
s 53(1)(c) - What is a ‘disposition’?
- A direct assignment of an equitable interest by a beneficiary is a ‘disposition’ of that interest. This is uncontroversial. The law relating to directions by a beneficiary to a trustee is more complex.
- Compare Grey v IRC and Vandervell v IRC; Grey involved a direction to the trustee to hold the trust property for a third party while Vandervell involved a direction to transfer full legal ownership to the third party.
34
Grey v IRC
FACTS: Trustees held shares on trust for Mr Hunter (‘H’). He orally directed the trustees to hold the shares on trust for his grandchildren instead. H’s intention was to transfer his equitable interest to his grandchildren by the oral direction. If he had transferred the interest by a direct written assignment, he would have incurred a significant tax liability.
HELD: The oral direction was a purported disposition of H’s equitable interest in the shares and was accordingly void. As a matter of substance, there was no difference between a direct assignment to a new beneficiary and a direction to the trustee to hold the trust property for a new beneficiary. Both involve the transfer of an equitable interest from one person to another and both must comply with s 53(1)(c).
35
Vandervell v IRC
FACTS: A trustee held shares on bare trust for Mr Vandervell (‘V’). V orally instructed the trustee to transfer the shares to the Royal College of Surgeons, which the trustee did.
HELD: The transaction was not a disposition of V’s equitable interest in the shares. Rather, it had the effect of extinguishing that interest, which had merged with the legal title. In effect, V had collapsed the trust.
36
Sub-trusts
- Where a beneficiary of a trust, A, declares a trust of their equitable interest under that trust for B, the trust created by A is called a sub-trust.
- the subject matter of a sub-trust is the equitable interest of a beneficiary under another trust.
37
Does a 'sub-trust' amount to a disposition?
- There is no direct authority on whether a declaration of a sub-trust amounts to a ‘disposition’ of the beneficiary’s interest under the principal trust.
- Recent cases support the view that, where a beneficiary declares a trust of their equitable interest, they create a new trust, and thus a new equitable interest (Nelson v Greening & Sykes)
- In other words, the declaration of a sub-trust involves the creation of a new equitable interest rather than the disposition of an existing equitable interest. On this approach, s 53(1)(c) has no application.
